Your finances

Alternatives sought to vulnerable 401(k)s

McClatchy NewspapersFebruary 2, 2013 

— As the father of two college-age kids, Rob Harris knew that finding money to pay soaring tuition costs wasn’t going to be easy. Reluctant to saddle himself or his children with loans, the 55-year-old product development manager from Kansas City, Mo., tapped another source: his retirement savings.

Harris plans to pay himself back, but his decision to prioritize his kids’ education is at least partly responsible — along with rising health care costs and a sluggish stock market in the past few years — for pushing his target retirement age from 59 to 62.

“Everyone says you shouldn’t do it, but there were several years the market was a big loss. You’ve got money there, you’ve got a real need, why not use it?” he said.

Harris is among a growing number of Americans who are dipping into their 401(k)s and other defined contribution plans to pay for more immediate needs such as tuition, overdue bills, credit cards and mortgages.

Twenty-five percent of American households withdraw a total of more than $70 billion from 401(k)s or similar retirement savings plans for non-retirement spending needs every year, according to a report published this month by the financial advisory firm HelloWallet.

With traditional pensions fading into memory, and Congress considering cuts to Social Security and Medicare, many Americans working in the private sector expect their 401(k) nest eggs to guarantee financial security in their older years. But in the aftermath of the Great Recession, increased “leakage” from 401(k)s in the form of cash-outs, hardship withdrawals and loans is worrying policymakers and retirement savings experts, who also bemoan the plans’ high fees and stubbornly low participation rates. Some are looking for ways to reform 401(k)s, or even offer innovative alternatives.

One such plan has been proposed by Teresa Ghilarducci, an economics professor at The New School in New York City and an ardent critic of 401(k)s.

“A good pension plan helps people accumulate money, helps them invest money appropriately, and helps people pay out your pension for life, and the 401(k) fails at all three of those dimensions,” Ghilarducci said.

Her plan would require that employers deduct 2.5 percent of their employees’ pay, a contribution that businesses could match if they chose. Employee contributions would be mandatory. The money would be set aside in a fund that pays a guaranteed, modest rate of return to supplement Social Security. The return could be guaranteed by a paid fund or an insurance company, and it would be paid out after a worker retired in the form of an annuity for the rest of that person’s life.

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